Joint Petitions; Joint Administration and Consolidation of Bankruptcy Cases of Closely Related Debtors
A married couple can file a joint bankruptcy petition, and sometimes the bankruptcy cases of closely related debtors may be jointly administered or consolidated into a single case.
A married couple may have joint debts or own property jointly, or they may own their homestead as tenants by the entirety, or they may have community property. Hence, even if only one spouse has serious debts, the question arises as to whether the spouse should file as a single debtor or file jointly with the spouse, since there can be a significant difference between the amount of property that the couple can retain in a single or joint petition. Section 302 of the Bankruptcy Code allows a married couple to file a joint case. Only a married couple can file a joint case; although a partnership can file for bankruptcy, it is treated differently under the Bankruptcy Code. A joint case can only be filed voluntarily — a creditor may only possibly bring an involuntary case against each individual spouse. If the bankruptcy of a corporation causes the insolvency of the owner, and each needs to file for bankruptcy, then they must file separate petitions.
The advantages of a joint case is that there is only one bankruptcy filing fee and the case is managed by the trustee as a single case; however, the bankruptcy estates of the spouses may not be combined, unless the bankruptcy judge decides that it would be expeditious to combine them. §302 A joint filing may allow a married couple to keep more of their property than if only one spouse filed, but they can only file jointly if they are legally married under both state and federal law.
Since the Bankruptcy Code is part of federal law, the Defense of Marriage Act (1 U.S.C. §7), which defines marriage as being between a man and a woman, does not permit a same-sex couple to file jointly, even if they are legally married under state law, although they can each file separately. Same-sex couples attempting to file jointly may be rejected by the court, or the trustee or the United States Trustee may file an objection. Although DOMA was overturned by the Supreme Court on 6/26/2013, there is some uncertainty as to whether a same-sex couple will be able to file in a state that does not recognize same-sex marriage, since state law is controlling after DOMA.
A heterosexual couple must have a valid state marriage license. However, a couple may also be eligible for a joint case, if they satisfy their state's requirements for common-law marriage. The following states allow some form of common-law marriage:
- District of Columbia
- Rhode Island
- South Carolina
Some of these states are phasing out common-law marriage and, thus, are only valid in those states if the common-law marriage was established before a specific date. Although the requirements for common-law marriage vary from state to state, most require that the couple intends to be married, and that they hold themselves out to be married, and they must have lived together for a significant amount of time, although the amount of time is not defined in any state.
Property and Exemptions under a Joint Filing
Generally, the main objective of debtors filing for bankruptcy is to be able to keep as much of their property as possible. Hence, whether they should file jointly will usually depend on whether it maximizes the value of property that they can keep.
One advantage of a joint filing in most states is that they allow each spouse to claim exemptions, thus effectively doubling the amount of property that can be protected from creditors. Exemptions allow debtors to keep certain property so that they have something to begin their fresh start, which is one of the objectives of bankruptcy. Only a few states do not allow doubling of exemptions or only allow doubling for certain types of property. However, 15 states allow a bankruptcy petitioner to choose either the state or federal exemptions, and the federal government allows joint petitioners to double their exemptions.
There are 2 types of property that will generally be treated differently under a joint case than if only one spouse filed: community property and property held as tenants by the entirety.
Community property is generally subject to the claims of creditors. Therefore, if a couple can double their exemptions in a joint filing, then they will be able to keep more of their property than if only a single spouse filed. If the couple is jointly liable for any debt, then if only one spouse files for bankruptcy, the other spouse will be liable for the entire debt.
Tenancy by the entirety (TBE) is a form of ownership that allows a married couple to own an undivided interest in the entire property. Generally, states that allow this form of ownership restrict it to married couples or — in some states, to registered domestic partners — and some states restrict this form of ownership to real estate.
TBE property cannot be transferred without the consent of both spouses nor can it be attached by creditors who only have a claim against one spouse. Under bankruptcy law, the claims of creditors are determined by state law, and therefore, TBE property does not become part of the bankruptcy estate if only one spouse files. However, the homestead will become part of the bankruptcy estate in a joint case.
Tips on Deciding Whether to File Bankruptcy Jointly
A joint filing is advantageous if:
- both you and your spouse have large debts;
- both you and your spouse are liable for specific large debts;
- you have considerable equity in community property.
A joint filing is disadvantageous if:
- you have considerable equity in TBE property, particularly your homestead, where a joint filing will cause your homestead to become part of the bankruptcy estate, and, therefore, may be sold to pay your unsecured creditors.
Although closely related debtors other than spouses cannot file a joint petition, Bankruptcy Rule 1015(b) allows the bankruptcy judge to combine their cases so that they can be administered more conveniently and at lesser cost by a single trustee. However, the bankruptcy estates remain separate.
Consolidation of Cases
Sometimes a judge will consolidate the cases of a corporation and its owners where the owners used the corporation to perpetrate a fraud against its creditors — what is often referred to as piercing the corporate veil.
The bankruptcy judge is also permitted to consolidate cases of closely related debtors by not only administering the cases as one, but also combining their bankruptcy estates, so that the assets and liabilities of all the debtors are combined, allowing the creditors to be paid from the pooled assets. Rule 1015(a) allows procedural consolidation in the very rare case when 2 or more involuntary petitions have been filed against the same debtor, in which case, the multiple petitions are simply merged and administered as a single case.
Substantive consolidation is sometimes imposed by the bankruptcy courts — using their power of equitable discretion — to consolidate cases against closely related debtors, such as closely related individuals, a corporation and its owner, or a corporation and its subsidiaries.
A major drawback to substantive consolidation is that some creditors may receive less from the consolidated bankruptcy estate than they would from their borrower's bankruptcy estate if it were not consolidated. Hence, courts will only exercise their equitable discretion to consolidate these cases if the creditors dealt with the debtors as a single economic unit or if the assets and liabilities of the debtors are so entangled, that the interests of the creditors and the administration of the case would be best accomplished by their consolidation.